The government has announced it will introduce tougher regulation of auto-enrolment (AE) master trusts, following industry pressure to weed out incompetent, irresponsible and potentially fraudulent providers.
The new rules will be the centrepiece of a pensions bill, announced today (Wednesday 18 May) as part of the Queen’s Speech.
Though full details of the bill have yet to be published, it will include a cap on early exit fees charged by trust-based occupational pension schemes and introduce a system enabling consumers to access pension freedoms without “unreasonable barriers”.
Last weekend, the Work and Pensions Committee published a damning report which found current weak regulations were putting the four-year-old AE system at risk.
“Auto-enrolment has been a tremendous success that will ultimately see approximately nine million people newly saving, or saving more, in a pension,” committee chair Frank Field MP said.
“Crucially, now we must do much more to ensure that people’s savings are put in the best possible place, and are secure.”
Financial Adviser found widespread support for stronger regulation.
Henry Tapper, founder of AE advice service Pension PlayPen, said that at the extreme end, master trusts “just get an HMRC number, set up, get a website, find a few mug employers, they pay you money, which goes in one door and out the other and no one gets any benefits”.
Many sub-standard providers were “well-meaning but undercapitalised”, he said, adding that a small number may be fraudulent. He has referred more than 20 master trusts to The Pensions Regulator since AE was introduced in 2012.
Some were offering dangerously undiversified investment strategies, he said, while others were exceeding the 0.75 per cent fee cap by masking fees as expenses taken out of investment returns.
Laurence Sanderson, a financial adviser with workplace specialist Sterling & Law, said the government’s commitment to better regulation was long overdue.
“Some master trusts are not robust in any way,” he said. “The biggest worry is what will happen when one of them goes bust. We’ve had enough pension scandals, and we don’t want another one.”
He added that some master trusts were sending out incorrect literature, telling low-income employees below the tax threshold that they’ll get tax back on their contributions.
“There’s a massive governance failure,” he said.
Pension minister Baroness Ros Altmann said many master trusts are operating well. But she admitted she was “worried maybe there’s a few – it won’t be many – not operating as well as you would want, or who might not be quite as secure for customers as you would want”.